Investing in the new resource bull market
After four grinding years of falling metal prices and vanishing market capitalizations, we have seen a stunning shift in market sentiment since mid-January, says Matt Geiger of MJG Capital. Multiple physical commodities are now in technical bull markets, and resource equities in particular have enjoyed a spectacular 2016 thus far. Geiger highlights several companies poised to take advantage of the boom.
Metal prices are again on the rise. Particular standouts include: silver, lithium, zinc, gold, platinum and palladium. All of the aforementioned metals have entered new technical bull markets in 2016 and seem to be building momentum. It took four painful years, but this proves yet again that low prices are the best cure for low prices. When the price of a particular commodity drops precipitously, two phenomenons inevitably occur: (i) higher cost suppliers of the commodity cut production and (ii) buyers of the commodity purchase more in real terms. These twinning events may take a while to play out, but they inevitably do.
M&A activity has picked up, particularly in Q2/16. This is great news for quality development projects not yet owned by a major producer. The recent bear market has a left a dearth of near-term production candidates and those still remaining are that much more valuable to a potential acquirer. Additionally, if this indeed becomes a multiyear bull market, then explorers too will receive increased attention. Shareholders of well-managed prospect generators are poised to do very well over the coming few years.
Here are a few companies that I believe are well positioned to ride the bull.
Golden Arrow Resources Corp. (GRG:TSX.V; GAC:FSE; GARWF:OTCPK) has been a strong performer in 2016. The company, founded by the experienced Joe Grosso, has been exploring and developing precious metal projects in Argentina for over two decades. Golden Arrow's flagship asset, the Chinchillas project in Jujuy Province, looks increasingly likely to reach production by the end of 2017 thanks to a joint venture with silver heavyweight Silver Standard Resources Inc. (SSO:TSX; SSRI:NASDAQ). Once the Chinchillas joint venture begins generating cash flow (or, conversely, is bought outright by Silver Standard), the company will return to its roots as a prospect generator focused solely on Argentina.
The market has rewarded Golden Arrow so far in 2016 for the following reasons:
- Chinchillas offers near-term production potential with a very affordable initial capex (thanks to synergies with JV partner Silver Standard and its producing Pirquitas asset).
- Due to its massive size and relatively low grade, Chinchillas is a classic "optionality play" with significant leverage to the price of silver (which has been the best performing commodity so far in 2016).
- Argentina's election of pro-business President Mauricio Macri has opportunistic mining investors streaming into the country.
Golden Arrow's Chinchillas project is a textbook optionality play—a relatively low-grade deposit that contains over 200 million silver-equivalent ounces. One key takeaway is that this is a massive project, particularly when you consider that at least 50% of the land package has yet to be explored. An ultimate resource of 500 million silver-equivalent ounces is optimistic but not impossible.
Golden Arrow is likely to "add another horse to the stable." This acquisition would likely be similar in geology to Antofalla, and the goal would be to discover another Chinchillas-like deposit. The company's deep experience in Argentina will give it a leg up in any negotiations that may take place.
Almadex Minerals Inc. (AMX:TSX.V) is another company that has taken off, with a 500% year-to-date gain. The company was formed just 12 months ago, when well-respected Almaden Minerals spun out its prospect generation business so the company could focus on Ixtaca. We started buying in Q4/15, when Almadex's market cap was equal to its working capital position. In hindsight, this was a ludicrous proposition considering management's multidecade exploration expertise in Mexico.
In the first half of 2016, the company was relatively quiet on the prospect generation front. Instead, the company's share price was buoyed by positive developments surrounding Almadex's royalty and equity holdings. There were three major developments:
- The materialization of Gold Mountain Mining Corp.'s (GUM:TSX.V) Elk Gold project into a legitimate British Columbia development play, on which Almadex owns a 2% NSR royalty
- The revitalization of the Ixtaca project, on which Almadex owns a 2% NSR royalty
- The sale of El Encuentroto to McEwen Mining Inc. (MUX:TSX; MUX:NYSE) for CA$250,000 (Almadex retained a 2% NSR royalty on the property)
However, just within the past two weeks, the company has demonstrated why the prospect generation business can be so exciting. On Aug. 8, the company announced an intersection of 163.5m at 0.68 g/t gold and 0.29% copper at its fully owned El Cobre project. These results were only for the top half of the hole and, sure enough, the company announced earlier this week that another 150.9m at 0.55 g/t gold and 0.22% copper was intersected below the initial zone of mineralization. Assays ended at 540m, with the news release stating that "Porphyry style alteration continues to the end of the hole, currently at ~890 meters depth and advancing."
While the full results from hole EC-16-010 have yet to be received, this already looks to be a legitimate discovery of a large copper-gold deposit. Over the coming months, Almadex will bring additional drill rigs to the property to both (a) conduct stepout drilling around hole EC-16-101 and (b) test several anomalous areas on the property that have yet to be drilled. These next six months hold the potential for immense value creation at El Cobre.
Nevsun Resources Ltd. (NSU:TSX; NSU:NYSE.MKT) remains my favorite mid-tier base metal play. While Nevsun's share price has lagged many of its peers, the company has had a sensational 2016 from a business perspective. The market will soon catch on.
There have been multiple positive developments thus far this year, but Nevsun's most significant was the acquisition of Reservoir Minerals and its world-class Timok copper-gold project in Serbia. Timok has become one of the most significant undeveloped base metal deposits in the world due to its high grade, massive size and proximity to existing mining infrastructure.
An April 2016 PEA on Timok's Upper Zone outlines the project's exceptional economics, including an initial capex of $213 million; a post-tax NPV of $1 billion (at 8% discount rate and spot metal prices); a post-tax IRR of 86%; and a payback of less than one year.
For a project of this size, these economics are virtually unheard of. Additionally they don't take into account Timok's Lower Zone, which may have a potential production life of 15–20 years. We'll learn more about the Lower Zone over the coming year as Nevsun has initiated an aggressive drilling program. In a best case scenario, the Lower Zone could double or triple the overall value of Timok.
Developments at the Bisha mine in Eritrea have been overshadowed by the high-profile Timok deal. However, there have been several significant developments this year worth noting, including Bisha's zinc expansion coming in on time and underbudget and Q1/Q2 supergene copper ore production of 55.8 million pounds at a C1 cash cost of $1.04 per payable, which was above guidance of 40-50 million pounds and under the cost guidance of $1.20 to $1.40 per payable pound of copper.
Additionally, Newsun announced that it had increased its total land package of exploration licenses to 814 square kilometers in Eritrea's Bisha VMS District. This represents a 1,891% increase from the 41 square kilometers the company had before the deal. This acquisition solidifies my belief that Nevsun will find enough ore to keep the Bisha mine producing for another three decades. This may be a VMS district on the same scale as Manitoba's Flin Flon district, which has seen 25 producing mines in the past century. I'm thrilled to see what the company can discover elsewhere in the district over the coming years.
Matt Geiger is the general partner at MJG Capital, a limited partnership focused on long-term capital appreciation through investments in natural resources.
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Source: Matt Geiger for The Gold Report
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2) Matt Geiger: I or my family own shares of the following companies mentioned in this article: Golden Arrow Resources Corp., Almadex Minerals Inc. and Nevsun Resources Ltd. I personally am or my family is paid by the following companies mentioned in this article: None. My company has a financial relationship with the following companies mentioned in this article: None. Funds under my company's control hold the following companies mentioned in this article: Golden Arrow Resources Corp., Almadex Minerals Inc. and Nevsun Resources Ltd.
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